Fearing an Impasse in Congress, Industry Cuts Spending

A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth in the coming months.

Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill.

Democrats and Republicans are far apart on how to extend the Bush-era tax breaks beyond January — the same month automatic spending reductions are set to take effect — unless there is a deal to trim the deficit. The combination of tax increases and spending cuts is creating an economic threat called “the fiscal cliff” by Ben S. Bernanke, chairman of the Federal Reserve.

Until recently, the loudest warnings about the economy have come from policy makers and economists, along with military industry executives who rely heavily on the Pentagon’s largess and who would be hurt by the government reductions.

Hubbell, a maker of electrical products, has canceled several million dollars’ worth of equipment orders and delayed long-planned factory upgrades in the last few months, said Timothy H. Powers, the company’s chief executive. It has also held off hiring workers for about 100 positions that would otherwise have been filled, he said.

“The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments,” Mr. Powers said. “We can see it in our order patterns, and customers are delaying. We don’t have to get to the edge of the cliff before the damage is done.”

The worries come amid broader fears that the economy is losing momentum — the annual rate of economic growth in the second quarter fell to 1.5 percent from 2 percent in the first quarter, and 4.1 percent in the last quarter of 2011.

On Thursday, the Commerce Department reported that factory orders unexpectedly fell 0.5 percent in June from the previous month, while data on the labor market released Friday showed job creation still falling short of the level needed to bring down the unemployment rate.

All told, the political gridlock in the United States, along with the continuing debt crisis in Europe, will shave about half a percentage point off growth in the second half of the year, estimates Vincent Reinhart, chief United States economist at Morgan Stanley.

More than 40 percent of companies surveyed by Morgan Stanley in July cited the fiscal cliff as a major reason for their spending restraint, Mr. Reinhart said. He expects that portion to rise when the poll is repeated this month.

“Economists generally overstate the effects of uncertainty on spending, but in this case it does seem to be significant,” he added. “It’s at the macro- and microeconomic levels.”

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“The fiscal cliff is the primary driver of uncertainty,” said Timothy Powers, the chief of Hubbell Inc., a maker of electrical products.Credit
Andrew Sullivan for The New York Times

Unless Congress acts to extend the tax provisions and comes up with a budget deal that averts the planned reductions in military spending and other government programs, taxes will rise by $399 billion while federal government spending will fall by more than $100 billion, according to an analysis by the Congressional Budget Office. The end-of-year battle comes after Democrats and Republicans have failed over the last year to reach long-term agreements on how to tackle the budget deficit.

Last week, Congressional leaders did manage to agree tentatively to keep the government financed through next March, extending a deadline that had been set to expire Oct. 1, but that deal did not address the extension of the tax cuts or spending reductions.

All together, the fiscal cliff’s total impact equals slightly more than $600 billion, or 4 percent of gross domestic product, and if no action is taken, the Congressional Budget Office projects the economy will shrink by 1.3 percent in the first half of 2013 as a result.

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With many Fortune 500 companies now setting budgets and planning for 2013, chief executives say they cannot afford to hope for the best. Wall Street is also paying more attention: over the last few weeks, chief executives of companies like Honeywell, U.P.S. and Eaton all cited the uncertainty as a threat to earnings in the second half of 2012.

“We’re in economic purgatory,” said Alexander M. Cutler, the chief executive of Eaton, a big Ohio maker of industrial equipment like drive trains and electrical and hydraulic systems. “In the nondefense, nongovernment sectors, that’s where the caution is creeping in. We’re seeing it when we talk to dealers, distributors and users.”

As a consequence, Mr. Cutler lowered Eaton’s projected results for 2012 in late July, adding that he sees particular weakness in the heavy-duty truck market. “I don’t think there’s any question the economy is starting to see an impact from the fiscal cliff,” Mr. Cutler said. He noted that as companies retreat, the effect is multiplied by the impact it has on other sectors, like restaurants and hotels.

Siemens, the German industrial giant, remains optimistic over the long haul about the American market, but has turned more cautious in the short-term, said the company’s chief financial officer, Joe Kaeser. Siemens has slowed the filling of openings among its 60,000 member work force in the United States, while delaying some new investments and capital expenditures. “We would expect volatility till after the election and the fiscal cliff is sorted out,” he said.

In Washington, powerful business lobbies like the National Association of Manufacturers, the Business Roundtable, and more specialized groups like the National Electrical Manufacturers Association have grown more vocal about their frustration with the inaction of Congress, and the possible dangers ahead.

“It’s totally irresponsible and absolutely insane,” said Evan R. Gaddis, the president of the electrical manufacturers’ group. “The two parties are really dug in. Companies see the writing on the wall and business decisions are now being made on this.”

Business leaders say the latest fight feels different. Last summer, during a confrontation over raising the debt limit that risked a government shutdown, Mr. Powers of Hubbell did not alter course at his company, as he is doing now. “We never expected the government to shut down,” he said. “This bluff carries much more weight.”

Many in Washington predict a solution that keeps most of the tax cuts in place and avoids the worst of the budget cuts in the short-term will emerge after the November election, but John Selldorff is not taking chances. As the chief executive of the American subsidiary of Legrand, a global manufacturer of power devices based in France, Mr. Selldorff says that for the rest of the year, his company plans to “hold off on doing things that we might otherwise do if the environment were more stable.”

“We’d love to hire more people, but we’re saying no,” he said.

Smaller companies that serve both military and civilian customers are also taking steps. Ace Clearwater, an aerospace firm in Torrance, Calif., began the year projecting a 7 percent rise in revenue, but now expects sales to be flat at best, down 10 percent at worst, said Kellie Johnson, the company’s owner.

As a result, Ms. Johnson said the company had decided not to fill eight open positions among its 200 member work force, canceled a half-million-dollar machine order, and opted to buy a used forklift instead of a new one, saving more than $100,000.

“Everyone is sitting back and hunkering down,” she said.

A version of this article appears in print on August 6, 2012, on Page A1 of the New York edition with the headline: Partisan Impasse Drives Industry To Cut Spending. Order Reprints|Today's Paper|Subscribe